Closing a limited company with debts to HMRC – what are the rules and options?

Closing a limited company is a complex process, even more so if the company has outstanding debts to HMRC. This article will outline the process of closing a company in this situation and explore the potential options available to UK directors.

What is HMRC?

The HMRC (His Majesty’s Revenue and Customs) is the UK’s tax, payments, and customs authority. Their primary responsibility is to collect taxes from individuals and businesses.

It’s essential to remember that any debts or liabilities to HMRC are considered serious, and as a company director, you have a legal obligation to address them.

Understanding insolvency

If your company cannot pay its bills, it is considered insolvent. In such situations, the interests of your creditors (those your company owes money to) legally come before those of the directors or shareholders​.

Insolvency is usually considered as a final course of action after all other ways to recover a debt have been examined. HMRC, as a creditor, will apply insolvency when they believe the company’s debt position will not be recovered, or they suspect the company is not being honest about the assets they hold​.

Understanding your options

If your limited company has debts it cannot pay, there are several options available. These options include dissolution, administration, a Company Voluntary Arrangement (CVA), or liquidation.

1. Dissolution: This is the process of closing down, or dissolving, a company voluntarily. It is generally suitable for companies that are solvent (can pay their debts). If your company has debts to HMRC, dissolution is unlikely to be a viable option, as any unpaid debts will result in the company being restored to the Companies House register for further investigation.
2. Administration: This involves an external administrator taking control of the company. The administrator will attempt to pay off the company’s debts through a restructuring plan or by selling the company or its assets.
3. Company Voluntary Arrangement (CVA): This is an arrangement between the company and its creditors (including HMRC) to repay some or all of the debts over an extended period. The arrangement is supervised by an insolvency practitioner and must be approved by creditors.
4. Liquidation: This involves selling off the company’s assets to pay its debts. There are two types of liquidation: compulsory and voluntary. Compulsory liquidation is enforced by a court order, usually as a result of a petition by creditors. Voluntary liquidation is initiated by the company’s directors.

How to close your company

If closing a limited company with debts to HMRC, it’s advisable to get professional advice from an insolvency practitioner or a legal adviser. They can guide you on the best course of action and ensure you comply with your legal obligations as a director.

The process you’ll follow will depend on the option you choose:

1. For a CVA: The insolvency practitioner will prepare a proposal for the creditors, detailing how the company plans to repay its debts. This proposal must be approved by at least 75% (by debt value) of the creditors.
2. For Administration: The appointed administrator will take over the running of the company and attempt to repay the debts. This may involve restructuring the company or selling its assets.
3. For Liquidation: The insolvency practitioner will sell off the company’s assets and use the proceeds to pay off the debts. If there are any funds left over, they will be distributed to the shareholders.

Dealing with debts to HMRC

In cases where a company has outstanding debts to HMRC, there are several mechanisms available to address this issue:

1. Company Voluntary Arrangement (CVA): This is an agreement between a company and its creditors, including HMRC, to pay all or part of the debts over an agreed period. CVAs need a licensed insolvency practitioner to propose a plan to creditors, which includes an overview of the company’s past history and future trading prospects. HMRC will review the proposal and vote on it, and they tend to support arrangements that are achievable and represent the best outcome for the country’s vital tax revenues.
2. Company Moratoriums: This is a provision under the Corporate Insolvency and Governance Act. When a company applies for a moratorium, it gets a period to restructure its finances, during which creditors, including HMRC, stop recovery activities. The period initially lasts for 20 business days but can be extended.
3. Bankruptcy and Winding Up Orders: If a company or individual cannot pay their debts, they may be declared bankrupt or be forced into liquidation. The appointed insolvency practitioner, known as a trustee for individual debtors or a liquidator for companies, is responsible for realizing the debtor’s assets and distributing them to creditors, including HMRC.

Remember, not paying taxes can result in penalties, and HMRC will take steps to recover the money owed, including using debt collection agencies and taking court action. Directors may also be held personally liable for company debts in certain circumstances.

Consequences of closing a company with debts to HMRC

Closing a limited company with debts to HMRC can have serious consequences.

If the company is liquidated and there are insufficient assets to cover the debts, the directors could potentially be held personally liable if they are found to have acted improperly or irresponsibly.

This is known as ‘wrongful trading’ and can result in directors being disqualified, fined, or even imprisoned.

In conclusion, closing a limited company with debts to HMRC is a complex process that should not be taken lightly.

It’s advisable to seek professional advice to ensure you choose the best option for your situation and meet all your legal obligations.

Remember, the earlier you address the issue, the more options you’ll have available. So, if your company is facing financial difficulties, speak to a qualified professional as soon as possible.

Directors’ loan accounts and VAT

If there is a loan to a director or their family that has not been repaid, this is considered an asset of the company. The liquidator has a duty to collect this for the benefit of all creditors. The loan must be repaid even if the director or their family has other debts​.

As for VAT, once a company is in liquidation, it is not required to submit regular VAT returns. However, the liquidator should submit a final VAT return covering the period up to the date of liquidation.

A new VAT registration number will be issued to the liquidator who will submit VAT returns covering the liquidation period​.

Please note that this is a complex area, and the advice of a solicitor or insolvency practitioner should be sought in these matters. This guide is intended to provide general guidance only.

FAQ for closing a limited company with debts to HMRC

Please note that this FAQ section provides a general guide and is not a substitute for professional advice. Always seek advice from a qualified professional when dealing with company closure, insolvency, or tax matters.